Cutting Our Way to Balance

Now, we'll begin to look at where we spend all that money. Below, please find two pie charts, blending a bunch of lower-level categories, and showing how the Federal outlays breakdown. On the left, you'll see the 2011 budget; on the right, the "Alternative" projection from the CBO, which assumes mainly that stuff like the "doc fix" continue to get passed every year, and that the Bush tax cuts never actually expire.

The first thing to note is that, if you hover over the segments, you'll find the percentage of GDP (not the budget) that each expenditure is. Remember that our goal should be for those expenditures to total to 19%, or less - yet in the 2021 budget, it's nearly 26%.

Next, let's think about the process of cutting spending, especially in light of how things went over the summer. After tremendous histrionics, Congress has sort-of agreed (through the failure of the "Super Committee") to cut 0.186% of GDP from the budget, annually.

This year, we'd need to cut a total of 5.1% to hit our target of 19%. These came 50/50 from the category of "Other" and "Defense". The reason they did is because the other categories are essentially uncuttable. I am also skeptical those cuts will actually happen.

However, this year is a bit odd, and it's not worth a lot of effort to try to make our plans based on it. In a decade, the picture looks a lot different, for a number of reasons:

Defense drops a lot as we (hopefully) stop fighting in Iraq and Afghanistan (and Libya)

Social Security and Healthcare increases. Frankly, I think OMB's estimate on this is optimistic - they're forced to work in a world where Obamacare's projected savings actually happen. Unfortunately, I don't have a good basis for changing it, so I'm leaving it as-is.

Interest payments on the debt are now a noticeable item (4.4% of GDP). In fact, because of this, we now only really have 14.6% of GDP to spend on things that actually do things. This number may be optimistically small, but we'll leave it there for the moment.

Shooting for the 2021 budget then, let's imagine we take all the stuff everyone in Washington loves to argue about. Funding for the Energy Department; Education; Health and Human Services - heck, let's toss a bunch of Veteran's benefits, and EITC, and Unemployment, and everything out the window. Let's cut the "Discretionary" budget to zero. What's the rest add up to?

18.8% of GDP. That's right, if we cut Defense spending from its current 4.7% of GDP to 2%; and eliminate everything else (and raise taxes 25%, but that's for tomorrow), we just barely get the Federal budget in balance.

In other words, all of the arguing in Washington can't possibly address the problem. And, I reiterate, we're imagining we've had a substantial tax raise, too - if you want to keep taxes where they are, you need to cut this thing even more.

What haven't we looked at? "Social Security and Healthcare". They're 12.4% of GDP in 2021. We're spending 4.4% of GDP on Interest, and that's basically non-negotiable. That means 85% of our sustainable spending that we can do anything about is going into this bucket. It breaks out like this:

As you can see, it's mostly Social Security and Medicare - both programs for the elderly. The way our elections work, it's basically impossible to cut these - there will always be enough voters who will swing on this issue that they'll be able to kick out anyone who tries. There's maybe 1% of GDP you could get in there by repealing Obamacare. Remember, if you're opposed to it - you expect it to cost a lot of money. The CBO, officially, doesn't, so it's scoring the cost in 2021 as being very small. If you think Obamacare is going to be very expensive, then you need to adjust these numbers up, accordingly (which means you need more cuts from elsewhere to bring it into balance).

As long as the parties have split power in Washington - as long one party doesn't have the Presidency; 2/3 of the Senate, and 1/2 + 1 of The House - no progress will be made on significant cuts. That much has been obvious for a while now. What's no so obvious is that, even if one party or the other took over, it is still not going to solve things. The Republicans, for all their talk, are not going to take on Social Security reform at the level of cuts that will be needed - it would be political suicide. The Democrats would prefer to concentrate on tax hikes; but, even if they accepted the need for spending cuts, they would be even less likely than the Republicans to take on the entitlement monster.

What's the bottom line? Making enough cuts to bring the budget into balance is going to be political suicide. As we've seen from other countries, politicians don't commit political suicide. The only way the budget will get significantly cut is when we lose the easy alternative of "just borrow more money."

Tomorrow, we'll discuss what the alternatives are for raising taxes instead of cutting things. Sneak preview: not good.